NFC-based mobile payments still years from mass adoption

The "mobile payments" industry isn't really about payments. It's about personalized, commerce-related services delivered to a user's smartphone or tablet: Paying for something is just one of them, and arguably the least important for now.

At least that's the argument of two recent reports from Forrester Research, a research and advisory firm based in Cambridge, Mass. The authors say that a mass market in mobile payments is still nearly a decade in the future, and rosy predictions to the contrary ignore the complex hardware and software infrastructures, standardization, business models, and consumer education that are needed.

Instead, users are more likely to see a new generation of easier-to-deploy "contactless services" for mobile devices, such as a mobile transport "pass" for bus and subway trips, an access card or "digital key" or boarding pass, hyper-local couponing or tourist information, and sharing information and services directly with other mobile devices. These are services that can be deployed faster by vendors and used, and trusted, more easily by consumers, according to the authors.

Contactless services usually are premised on a very short-range wireless technology called Near-Field Communications or NFC. Smartphones running an app such as Google Wallet can be waived at an NFC reader attached to a cash register, for example, and a transaction charged or debited to an account.

Reiterating a 2009 Forrester prediction that "mobile contactless payments wouldn't hit the mass market for another decade," analyst Thomas Husson, writing in "NFC: What Lies Beyond Contactless Payments," says, "That prediction still holds despite numerous [industry] initiatives. ... We see NFC as merely a technology enabler for several types of mobile contactless services; we don't believe the majority of consumers will use mobile contactless payments before the end of the decade, even in the most developed countries like Poland and the UK."

One key reason is that "NFC alone won't create a more convenient experience [for shoppers]," Husson says. "What problem is NFC-based payment solving? For now, mobile contactless payments provide only marginal improvements to established systems like cash and credit/debit cards."

Given that fact, he says, "it is critical to infuse significant value throughout the purchase journey -- before, during, and after payment -- to provide a smart commerce experience. NFC is just a technology; mobile contactless payments have to be part of a broader move to a completely digital chain of commerce that combines not only payments but also digital receipts, personal finance management services, geolocalized coupons, loyalty cards, and much more."

With iOS 6, announced in June, Apple introduced Passbook, a new feature that lets iOS users store digital coupons, boarding passes, tickets and loyalty cards in one place. It was widely interpreted as a "step toward a digital wallet," but at least for now it focuses on exactly the kind of services and conveniences that the Forrester authors predict consumers will readily embrace.

Husson's assessment was echoed by his colleague Denee Carrington in "Why The Digital Wallet Wars Matter," where she argues that "Neither consumers nor merchants are struggling with the swipe mechanism of traditional card payments, leading many to wonder if mobile digital wallets are a solution in search of a problem. The real promise of digital wallets lies within their ability to facilitate payment (mobile or otherwise) while simultaneously enabling smarter, more efficient commerce through delivery of value-added services -- before, during, and after the payment moment."

Those include offers and coupons (Google offers, DealMap, Brands4Friends), product information (Zagat, TheFind, ShopSavvy 5) and loyalty and rewards incentives (foursquare, CardStar, Shopkick), all in addition to mobile payments, and all dealing with different stages or requirements of shopping decisions.

Her definition of "digital wallet" reflects these diverse elements: "a digital service -- accessed via the web or a mobile application -- that authorizes payment transactions from one or more payment sources and facilitates other commerce-related features, such as offers, coupons, loyalty rewards, electronic receipts, and product information."

Carrington predicts these services actually may be more quickly introduced and adopted via "hardware agnostic" alternatives to NFC, at least in the next few years. "These solutions range from full terminal integration to utilizing barcodes and cloud-based payments," she writes. "In most cases, they present fewer hurdles for merchants and consumers than NFC-based solutions, and as a result, we will see many of them launch with faster adoption rates in the marketplace."

There are three main NFC rivals in this class. One is PayPal, which is aggressively extending its reach from online purchases to offline purchases via POS integration at chains like Home Depot. Meanwhile, MasterCard and Visa are taking aim at online payments: "Both are rolling out PayPal-like digital payment solutions. Both networks aim first to establish their digital wallets online and then extend them for use in person at POS."

A second alternative is created by new entrants with new business models, such as LevelUp and Pay with Square. Both enable "consumers to access a digital wallet via their mobile phones at POS -- LevelUp uses a barcode to access data in the cloud, and Pay with Square uses location and visual confirmation of identify to facilitate payment. But, unlike other digital wallets, LevelUp and Square's Register application also deliver clear value to the merchant through embedded loyalty programs and back-end analytics, and merchants who don't have either should find these features appealing,"Carrington writes.

Third, branded wallets -- such as the one introduced in 2012 by Starbucks -- leverage customers' existing affinity with a retailers "to deliver a pleasing mobile payment experience linked to [the vendor's] loyalty program." Service providers like mFoundry and Paydiant offer these capabilities to retailers who can then brand them as their own.

But a variety of market forces finally are converging in the U.S. to create a foundation for larger-scale adoption of NFC-based mobile wallets and their attendant services, Carrington says. By 2016, more than 25% of U.S. consumers will have an NFC-equipped phone, she says. There is wide and intense speculation for example that Apple's iPhone 5, which may be announced in September, will have NFC.

The move to adopt the industry EMV payment standard -- which governs the interaction between a chip-based smartcard and a corresponding point-of-sale terminal -- "will spur point-of-sale terminal upgrades that can be configured to support NFC as well," Carrington says. But even so, she adds, merchants are likely to wait for more evidence of a "clear business case" for NFC before taking the plunge on a large-scale.

And the sheer proliferation of NFC technology will spark what Carrington calls "new consumer interactions," especially in unattended venues such as vending machines, parking and transit, where NFC "can deliver faster and more convenient payments." And branded programmable NFC tags can be easily distributed, "introducing a new way to engage with consumers" through "real-time interaction on the street with smart posters, in-store with smart displays, or even in the consumer's home."

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